CDs Are Going to Be a Bad Deal in 2025

The Fed cut its benchmark interest rate by 0.50% on Sept. 18 — and they’re probably not done. According to the Fed’s own forecasts, Americans can expect to see another 0.50% of rate cuts by the end of 2024, and another 1.00% of rate cuts in 2025.

This is bad news for yields on CDs. If you want to open a CD and lock in a high APY before Fed rate cuts, right now could be a good time — but beware of a few limitations and risks. Other accounts could be a better place to keep your cash.

Here are a few reasons why CDs are likely to be a bad deal in 2025.

Lower interest rates means lower CD yields

CD yields are fixed for the term of the CD — for example, if you open a 12-month CD at 4.50% APY, you are guaranteed to keep earning that same 4.50% APY for the full 12 months, even if interest rates are cut during that time period. But before you open a CD, or before you renew a CD for a new term, the APY on CDs can go down (or up) at any time based on the bank’s decisions and in response to overall interest rates.

Banks are constantly calculating and adjusting how much they can pay on CDs to attract customers’ deposits while staying profitable. Now that the Fed has started lowering rates, the best CDs are likely to stop paying such high rates.

Until recently, some of the best CDs were paying 5.00% APY for a 12-month term. As of Sept. 21, 2024, after the Fed’s 0.50% rate cut, some of the best 1-year CD rates had already shifted lower, into a range of 4.50%-4.70%. But if the Fed cuts interest rates by another 1.50% by the end of 2025, the best CDs might soon only be paying 3.00% APY or less.

CDs have a hidden risk: Early withdrawal penalties

CDs are often considered to be one of the safest places to keep your savings. You get FDIC insurance and a fixed yield on your cash. But CDs have one underrated risk: early withdrawal penalties. If you need to take cash out of your CD before the agreed-upon term of time, the bank can take away most (or all) of the interest that you’ve earned.

This is another reason why CDs will likely be a worse deal for savers in 2025. If you think about the risks and downsides, the pain of early withdrawal penalties gets bigger when your APY is only 3% or so.

CDs are not paying enough yield to be worth the risk of losing your interest income to penalties. I haven’t opened any CDs even at 5.00% APY, and I definitely wouldn’t open one at 3.00% APY (or lower).

What to do with your cash instead of a CD

CDs can be the right choice for some savers and investors, even with lower interest rates. If you’re a retiree who needs income, or if you’re a high-net-worth investor with lots of cash in the bank, CDs can give you a fixed yield and minimal risks.

But CDs are not the right choice for most Americans. The typical American has only $8,000 of money in the bank, including checking and savings accounts. Most Americans can’t afford the risk of locking up money in a CD and paying penalties for early withdrawal.

Instead of CDs, here’s what you should do: Open a high-yield savings account. Even if the best savings accounts start paying less interest, many Americans are likely going to be better off keeping their cash in a savings account.

That’s because savings accounts don’t charge early withdrawal penalties. With a savings account, your money is liquid and easy to access anytime. And even if the Fed keeps cutting interest rates through 2025, the best savings account APYs are still likely to be competitive with the best CDs.

Bottom line

I’ve never been a big fan of CDs, even during the past few years of higher interest rates and 5.00% APYs. Most Americans are likely to be better off keeping their extra cash in a high-yield savings account. Even if the Fed keeps slashing the federal funds rate through 2025, the best savings accounts will give you FDIC insurance and a decent yield on your cash.